Why we’re not safe from Grexit yet

ATHENS — A team of analysts from one of the main credit rating agencies smiled condescendingly across a boardroom table one recent afternoon, when asked about the likelihood of a Greek exit from the euro. It was clear they dismissed the idea. There is virtually no chance of Greece leaving the eurozone, they assured me.

This is not the first time that credit rating agencies have fallen asleep at the switch. Greece’s struggles to complete its first bailout review and simultaneously manage the arrival of thousands of refugees on its shores are likely to come to a head this summer. And you can bet Grexit will be back on the table.

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Almost exactly a year after Syriza rocked the Greek political establishment by winning the January 2015 general elections, international news outlets have all but dropped the subject of Greece’s fiscal profligacy that so dominated headlines in 2015. But this is unlikely to last. Greece’s creditors are heading to Athens this week to discuss Greece’s first review under the third bailout program.

As has been the case many times before in Greece, this review should already have been completed and the funds released.

The main sticking point is pension reform. The third bailout program calls for pension cost savings of 1 percent of GDP in 2016. The government has implemented measures achieving two thirds of that the target so far, leaving a gap of roughly €600 million.

Syriza’s plans to make up the gap include higher contributions from farmers and the self-employed, an unpopular proposal that has led to widespread protests across the country. Considering that, according to the Small Enterprises’ Institute, more than 50 percent of Greek households relied on pensions as their main source of income in 2015, it’s no wonder pension cuts are a particularly toxic issue in Greek politics.

Protests haven’t seriously threatened government cohesion so far, but that could change: With only a three-seat majority in parliament, the Tsipras government has little room to maneuver. If the coalition loses its majority, government cohesion will suffer significantly.

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There are a number of reasons why we can expect creditors to play hardball with Greece. First of all, the risk of pushing the current government to the point of collapse is no longer the deterrent it once was. Since the beginning of the Greek bailouts in 2010, successive governments argued the creditors were better off negotiating with them than with an anti-bailout opposition party. This argument no longer holds true.

With Kyriakos Mitsotakis newly elected at the helm of the opposition New Democracy, there is now a viable alternative for a prime minister who is relatively constructive on the bailout. Arguably, some creditors might prefer to deal with Mitsotakis than with Tsipras.

Merkel and Tsipras agreed that the only rational way forward was for Greece to leave the eurozone. If they came to that conclusion once, it’s possible they’ll come to it again.

Secondly, the IMF has not yet decided if it will participate in the third bailout. It has said it would only be willing to take part if Greece’s debt is sustainable, which either entails debt relief or an even more painful fiscal adjustment for Greece. So far the other creditors have shown little appetite for debt relief. Eurogroup chief Jeroen Dijsselbloem recently said the eurozone may be able to consider debt relief for Greece in 10 or 15 years.

The IMF is therefore likely to drive a very hard bargain on the fiscal adjustment Greece must undergo. The IMF can rely on support from Germany in particular. German Chancellor Angela Merkel has been insistent on IMF participation in the third bailout to give her political cover with the Bundestag.

Thirdly, Greece’s debt crisis is only one of a number of crises that Europe currently faces, among which the overwhelming influx of refugees, Britain’s renegotiations on its position in the Union, and the ongoing Ukrainian crisis loom large.

The Greek government seems to think that this means Merkel, who has come under increasing political pressure for her stance on refugees, will offer Greece concessions to close the first review without too much trouble. But given the toxic politics between the two countries, the opposite seems more likely.

At one point during the negotiations for the third bailout program, Merkel and Tsipras agreed that the only rational way forward was for Greece to leave the eurozone. If they came to that conclusion once, it’s possible they’ll come to it again.

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The hard deadline for agreeing the first review and releasing funds for Greece is when Greece runs out of money and cannot afford a debt repayment. This will come in July, when Greece has over €3.5 billion in debt to roll over.

But by late July, Greece could be a fundamentally different country. The flow of refugees from the Middle East slowed from over 200,000 in October 2015 to over 50,000 in January 2016 but is likely to pick up again as the weather improves. Other EU countries have complained that Greece is not following the rules on setting up hotspots and registering refugees that come across the Aegean via raft from Turkey.

Tsipras will have a hard time making concessions to the creditors while keeping his government together in the face of rising euroskepticism.

The German chancellor’s open-armed welcome to refugees arriving in Europe, over 1 million of whom came to Germany, was called into question by the mass sexual assault in Cologne on New Year’s Eve in which most of the suspects were asylum seekers. With her popularity dwindling and an upcoming general election in Germany in 2017, Merkel is looking for ways to stem the flow of refugees.

Rather than reintroducing Germany’s national borders, a more politically appealing option for Merkel would be to outsource border closures to Macedonia and Bulgaria, stranding a number of asylum seekers in Greece.

Redrawing the Schengen boundaries to exclude Greece would deal a major blow to the country’s relations with the EU. If Greece fails to fulfill its commitments to protect its borders and establish hotspots for refugees, goodwill among creditors to find agreement on the bailout negotiation in July will in short supply.

And among Greeks, anti-EU sentiment is likely to grow as the country is forced to handle the brunt of a refugee crisis not of its own making and without sufficient financial and political support from the rest of Europe. Tsipras will have a hard time making concessions to the creditors while keeping his government together in the face of rising euroskepticism.

Germany’s Finance Minister Wolfgang Schäuble outlined the creditors’ attitude towards Greece at the World Economic Forum in Davos when he glibly told Tsipras, “It’s the implementation, stupid.” It seems unlikely the creditors will be willing to cut Greece much slack in this bailout review. Tsipras will have a hard time implementing what is being asked of him without his government collapsing.

As Greece faces a financing crunch in July, it will also likely see the influx of refugees hit fever pitch. In the absence of a coherent and effective European migration policy before July, it’s hard to imagine Greece avoiding expulsion from Schengen — and with the new line for Europe drawn at Greece’s northern borders, Greece will be one step closer to being out of the European project.

Last summer, Schäuble suggested Greece take a temporary break from the eurozone, and relations between Germany and Greece have only deteriorated since. It is likely Schäuble will put his proposal back on the table this summer. Greece’s fate may ultimately be determined by how much solidarity there really is in Europe — in which case, the future looks grim.

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trisul

Greece will not exit for the simple reason that they are better off in the Eurozone than outside it. If they step out, their salaries get quartered or even decimated, while the opposite happens to their debt, which actually grows. It is simple Greek self-interest that is keeping them withing. Germany is willing to pay billions to have them step out.

Posted on 2/1/16 | 3:49 PM CEST

danallen

We live in a world in which a gov’t cutting its budget by 40% alongside a drop in GDP of 30% is described as “Fiscal Profligacy.”

Posted on 2/1/16 | 4:41 PM CEST

Pwlambson

“If Greece fails to fulfill its commitments to protect its borders and establish hotspots for refugees, goodwill among creditors to find agreement on the bailout negotiation in July will in short supply.”

These creditors apparently have no knowledge that little Greece has one of the longest coastlines in the world, with over 1,900 islands–how does one “protect” borders like these? They have as much understanding about Greek geography and the ongoing refugee crisis as they do about economics, especially as they continue to impose severe austerity measures that, 6 years later, have rendered what could have been a recovering Greek economy into one that’s essentially dead. With partners like these who impose such toxic economic measures, then threaten to leave Greece out of Schengen, and then pay Turkey(?) over 3 billion euros to control the flow of refugees coming from their shores (how’s that workin’ out so far, Angela?), I can only hope that there is a Grexit in Greece’s near future, for Greece’s sake.

Posted on 2/2/16 | 3:56 AM CEST

Strindberg

These are JUST WORDS, nothing else. The Greeks can do whatever they want to. Brussels is paralyzed and they know it.

Otherwise: Greece should not have been accepted in the euro-sphere, They have lied for many-many years and nothing happened ’cause the elite in Brussels was afraid of telling them the truth and pulling their ears. So there were no limits for lies and no consequences. This is a great educational principle. “You (Greece) can do what you want and we (EU) will take the consequences and pay the bills!”.

In a sober world the Greeks should have been thrown out of the euro and Schengen-treaty ages ago. They just do not want to improve. But in Brussels nobody has the guts to say “GET OUT!”
So the show will go on.

(Otherwise, Mr Orban of Hungary “the Evil”, can show how a border can be defended.)

Posted on 2/2/16 | 10:17 AM CEST

Veritas-Semper

Why so glum, Mr. Greene? Grexit is the best option for Greece. Aha, it must be the other future that you must be thinking of, that of the EU Project. Yes, the EU Project in its left-wing careening-mode is definitely on its way to a dead-end.

However, the only salvation for Greece – and its future generations – is to leave the euro-zone and finally take charge of its own fate through direct control of its own economy.

That’s actually the most optimistic option on the table for Greece and hopefully their leadership finally seizes upon it.

Posted on 2/2/16 | 3:22 PM CEST

tz

Greece is better off if it leaves the Euro everyday more and more Greeks see it this way it is a matter of time. One company after the other either leaves Greece or files for bankrupcy today on thr news it was said a supermarket chain Marinopoulos-Careffour have filed for bankrupcy closing 1000 stores and affecting immediately 15000 jobs and another 5000 on the side their is no future in the Euro for Greece

Posted on 2/2/16 | 4:37 PM CEST

Detlef Müller

A Grexit would be the ideal solution for many problems. No more need to pump money into this bankrupt economy. Greece could devalue immediately and become more competitive (yes, we may need to forego some of the credit payments). But even better, we could exclude Greece from the Schengen Zone. Securing the Schengen border would be much easier all of a sudden. And, we could transport all people with refused asylum claims back to Greece as a secure third state – because they came from there. Since they couldn’t return into EU and wouldn’t get a lot of help in Greece, many would soon try to return to their countries – we may even help them with that.

Posted on 2/3/16 | 2:41 AM CEST

HarryOld

Frankly, as a foreign investor in Greek banks that already got wiped out because of Tsipras and Syriza’s amateurish incompetence, I would prefer to see the Greeks get the disaster they asked for. I don’t know why anyone would help these people anymore.